System and method for dynamic path- and state-dependent stochastic control allocation

ABSTRACT

The invention includes a system and process that employs contractual bargaining with agent-based computational methods for the dynamic allocation, optimization, and pricing of contingent rights and obligations between multiple counterparties with overlapping interests. The processes employ a dynamic and endogenous hierarchy or tiering of binding incentive compatible contingent strategies, which may include optimal liquidation policies for matched assets and liabilities based upon stochastic volume/price schedule related to statistically non-stationary supply/demand elasticities and order-flow, as well as variations in market microstructure. The invention includes a dynamic open system with distributed stochastic control of strategic interactions among dynamic optimizing agents across random states, wherein the actions of any one affects the joint costs and benefits for all the agents.

CROSS-REFERENCE TO RELATED APPLICATION

This application is based on and claims priority to U.S. ProvisionalPatent Application Ser. No. 60/890,861, filed on Feb. 21, 2007 andentitled SYSTEM AND METHOD FOR DYNAMIC PATH-AND STATE-DEPENDENTSTOCHASTIC CONTROL ALLOCATION, the entire contents of which is herebyincorporated by reference.

BACKGROUND

1. Field of the Invention

The present invention relates to transactions, and, more particularly,to mitigating risk and optimizing gain between multiple parties inmultiple transactions in involving state-dependent and path-dependentconditions where outcomes maybe jointly interdependent between partiesand across transactions.

2. Description of the Related Art

Offsetting risk associated with transactions, particularly involvingtangible and intangible assets, is known in the art. Known products inthe marketplace include those incorporating asset/liability managementand economic capital allocation. Products incorporating these modelsoperate to net and offset multi-lateral financial claims withinfinancial intermediation vehicles and trading environments.

In asset/liability management systems, known applications attempt tomatch amounts that a party owes (or what that party might owe in thefuture) to assets and capital that the party owns. Asset/liabilitymanagement models are employed to strike a balance between, for example,a current value of an asset and its current use, including what theasset is able to generate in terms of current income from its use, andthe asset's terminal appreciation or depreciation. Asset/liabilitymanagement systems evaluate how a party's various states evolve overtime, and the effect of those states with respect to cash flow. In atypical borrowing arrangement, a party borrows X dollars, and the partyuses the money to purchase Y asset. Use of the Y asset results in Zamount of money being earned. The party uses the Z amount of moneyearned by using the Y asset to repay the X dollars. In connection withthis simple example, asset/liability management systems function toensure that the Z amount of money is sufficient to pay back the Xdollars (plus interest), given fluctuations in value of the Y asset andfluctuations in the current and relative value of X dollars plusinterest.

Economic capital allocation systems take into consideration the presentvalues of cash inflows and cash outflows, as determined viaasset/liability management models, and further determine the cost ofcapital in case the borrowing party was to allocate capital, forexample, in connection with a first alternative action (A), a secondalternative action (B) or a third alternative action (C). Thus, economiccapital allocation models estimate possible paths of future cash flows(both in and out) given certain conditions, calculate values of aparty's assets versus that party's obligations, and attempt to determinea particular path that maximizes return. In other words, unlike simplerasset/liability management systems, economic capital allocation systemstry to ensure that not only are debts are paid by a party, but that theparty has maximized his return relative to some level of risk.

Prior art applications, therefore, calculate tradeoffs between anasset's value in a given market and the asset's use or disposition,including credit risk that might give rise to adverse risk-shifting andasset substitution, and require contingent allocation of control rightsas a mitigant. Unfortunately, such systems are labor-intensive andinvolve exposing counterparties to unacceptable amounts of basis andsettlement risk. For example, prior art systems fail to effectivelyparse fundamental asset risks, market risks (price volatility, value atrisk, liquidity, interest rates), credit (counterparty default andspread risk), and/or operational risks. Also, prior art solutions failto effectively disaggregate and recombine dynamically evolving risks,and do not effectively map between state-dependent probabilities,decisions, and values across counterparties. Further, prior art systemsfail to adequately account for informational asymmetries, such asprivate information or unobservable/unverifiable actions, and alsocostly verification of both states and types, especially where autonomyand anonymity may be necessary, or multiple equilibria (i.e. switchingbetween cooperative and noncooperative regimes). Such states may resultin moral hazard and adverse selection, resulting in holdup,risk-shifting, predation, asset substitution, and other forms ofopportunistic wealth expropriation behaviors. Such behaviors tend toproliferate under conditions where costly monitoring/verification andcontract imperfection results in incomplete state-spanning by markettransactions.

Other shortcomings in the prior art include a failure to adequatelyaccount for transactions across parties with multi-attributevaluations/utilities, adaptive utilities, and/or non-stationarystatistical processes. Moreover, prior art systems do not adequatelyaddress uncertain time horizons and entry/exit of counterparties betweenthe initial and final states (i.e. initial and terminal trade dates) inan open system.

SUMMARY

The systems and methods described herein address these shortcomings byemploying contractual bargaining via agent-based computational methodsfor dynamic allocation, optimization, and pricing contingent obligationsbetween multiple counterparties. The processes preferably employ ahierarchy or tiering of binding incentive compatible contingentstrategies which include optimal liquidation policy for matched assetsand liabilities based upon stochastic volume/price schedule related tostatistically non-stationary supply/demand elasticities and order-flow,as well as variations in market microstructure.

Accordingly, a business method is disclosed for path- andstate-dependent, incentive compatible dynamic allocation of assetcontrol rights, depending upon stochastic or random conditions. Theprocesses include matching offsetting state-dependent contingent claimsutilizing systematic application of decision theoretic/game theoreticmechanisms.

In one particular embodiment, a system and method for dynamicallyallocating control rights to offset risks and to optimize net gain ornet loss associated with an inventory of at least one of assets andliabilities is provided and used to secure an extension of credit. Atleast one respective agreement related to the extension of credit to beexecuted by each of a plurality of counterparties is provided to andexecuted by each of the counterparties, whereby the counterpartiesbecome contractually bound. Further, respective inventory is receivedfrom at least some of the counterparties for securing the extension ofcredit, and the respective inventory is aggregated into an inventorypool.

Continuing with this embodiment, a respective margin amount is chargedto each of the at least some of the counterparties, wherein therespective margin amount is proportional to an initial value of each theat least some counterparty's pro rata inventory contribution, and afunction derived from state-dependent and path-dependent dynamicsgoverning the value of that contribution over time. Further, therespective margin amount is subject to change over time. The extensionof credit is secured with the inventory pool and the control rights toat least some of inventory in the inventory pool are allocated in caseat least one respective agreement term is not met by at least one of thecounterparties.

Other features and advantages of the present invention will becomeapparent from the following description of the invention that refers tothe accompanying drawings.

BRIEF DESCRIPTION OF THE DRAWINGS

For the purpose of illustrating the invention, there is shown in thedrawings a form which is presently preferred, it being understood,however, that the invention is not limited to the precise arrangementsand instrumentalities shown. The features and advantages of the presentinvention will become apparent from the following description of theinvention that refers to the accompanying drawings, in which:

FIG. 1 is a diagram of an example hardware arrangement that operates forcontrol allocation of assets and rights, constructed in accordance witha preferred embodiment;

FIG. 2 is a block diagram illustrating functional elements of aninformation processor or user workstation in accordance with a preferredembodiment;

FIG. 3 shows a block diagram arrangement of parties associated togetherin accordance with a preferred embodiment;

FIG. 4 is a block diagram that illustrates parties, assets and capitalin accordance with an embodiment;

FIG. 5 is a state diagram representing a plurality of parties and aplurality of transactions over time in accordance with an embodiment;

FIG. 6 illustrates conditional payoffs for each party illustrated inFIG. 5 in connection with possible states;

FIG. 7 illustrates functional software agents that employ a variety offunctions, mechanisms, and devices;

FIG. 8 illustrates software agents transacting on behalf of transactingcounterparties, in accordance with a preferred embodiment;

FIG. 9 illustrates component aspects of agents, in accordance with apreferred embodiment;

FIG. 10 shows a general list of mechanisms, functions and devicesprovided in hierarchical contractual rules associated with an agent; and

FIG. 11 illustrates a timeline of steps associated with pre-commitment,commitment, pre-closing, purchase, facility tenor, termination and posttermination periods, according to a preferred embodiment.

DESCRIPTION OF EMBODIMENTS

The present invention relates to multiple transactions across aplurality of parties and operates to mitigate collective risk andoptimize collective gain notwithstanding the parties being subjected tostate-dependent conditions. This balances individual incentives withcollective incentives and encourages parties to participate. In part,this is accomplished by accounting for evolving contractual rights andduties among a plurality of parties by considering decisions andallocation of rights across states and paths. Further, the presentinvention operates to secure contractual rights, including, byoffsetting corresponding payments, across simulated states and paths.Further, the present invention accounts for probable outcomes givenactivities of other parties to related transactions. In a preferredembodiment, the present invention further supports parties exchangingpaths, and regularly and frequently recalculates values and simulatesstates given a plurality of paths in accordance with the exchangedpositions.

Each of the relevant contracts between the transacting parties (commonlyreferred to as “counterparties” in financial and commercialtransactions) is translated into a library of binding contractual rulespossessed by each agent. The library is structured to encompass thecontinuum of all contingencies materially relevant to the transactionsbetween the counterparties' agents. At each date, as each transitionalstate is realized, each agent may transact on behalf of its respectivecounterparty, based upon a state-dependent utility function, the path ofrealized states and simulated paths of future states. In order tomaximize individual or collective expected utility, agents may chooseeither of the following: (A) based upon an opt-out function, at anydate, any agent may pay a termination penalty to exit the system. (B)Based upon a path-switching function, any two or more agents may pay asubstitution/replacement option premium in order to exchange pathhistories. These relevant “side payments” (premium or penalty) arededucted from the (endowment, spread reserve, contingent payoff)accounts of those respective agent(s) engaged in opting out or switchingpaths.

Information may be sent or received via an internet web site comprisinga related set of files which are maintained in one or more computersystems (e.g., web servers) and which, when transmitted to a userterminal, cause a user terminal to display and/or execute programmaticoperations corresponding to the data contained in the files. Typically,the files comprising the web site are prepared using one or more of acombination of Hyptertext Mark-Up Language (HTML), Extendable Mark-UpLanguage (XML), Java Applets, ActiveX programs, Standard GeneralizedMark-Up Language (SGML) files and the like. Web site files are typicallytransmitted to a user terminal using one or more protocols, such as theHyptertext Transfer Protocol (HTTP) under the Transmission ControlProtocol/Internet Protocol (TCP/IP) suite of communication protocols.

Also as used herein, browsers refers to an application program residingand executing on a user terminal which functions as an HTTP client,sending requests to web servers for web site files. A request istypically sent in the form of a Uniform Resource Locator (URL) or byselecting a hypertext link presented on the user terminal display. Thebrowser functions to format the file and/or data received from the webserver and format the received files and/or data in the manner describedtherein, displaying the same on the user terminal. Examples of browserprograms include MICROSOFT INTERNET EXPLORER and NETSCAPE NAVIGATOR.

As used herein, the term, “module,” refers, generally, to one or morediscrete components that contribute to the effectiveness of the presentinvention. Modules can include software elements, including but notlimited to functions, algorithms, classes and the like. Modules alsoinclude hardware elements, substantially as described below. Modules canoperate independently or, alternatively, depend upon one or more othermodules in order to function.

Referring now to the drawings figures in which like reference numeralsrefer to like elements, there is shown in FIG. 1 a diagram of an examplehardware arrangement that operates for control allocation of assets andrights, constructed in accordance with the present invention, anddesignated generally as “control allocation system 100.” Controlallocation system 100 is preferably comprised of one or more informationprocessors 102 coupled to one or more user terminals 104 acrosscommunication network 106. Further, printed output is provided, forexample, via output printers 110.

Information processor 102 preferably includes all necessary databasesfor the present invention. However, it is contemplated that informationprocessor 102 can access any required databases via communicationnetwork 106 or any other communication network to which informationprocessor 102 has access. Information processor 102 can communicatedevices comprising databases using any known communication method,including a direct serial, parallel, USB interface, or via a local orwide area network.

User terminals 104 communicate with information processors 102 usingdata connections 108, which are respectively coupled to communicationnetwork 106. Communication network 106 can be any communication network,but is typically the Internet or some other global computer network.Data connections 108 can be any known arrangement for accessingcommunication network 106, such as dial-up serial line interfaceprotocol/point-to-point protocol (SLIPP/PPP), integrated servicesdigital network (ISDN), dedicated leased-line service, broadband (cable)access, frame relay, digital subscriber line (DSL), asynchronoustransfer mode (ATM) or other access techniques.

User terminals 104 preferably have the ability to send and receive dataacross communication network 106, and are equipped with web browsers todisplay the received data on display devices incorporated therewith. Byway of example, user terminal 104 may be personal computers such asIntel Pentium-class computers or Apple Macintosh computers, but are notlimited to such computers. Other terminals which can communicate over aglobal computer network such as palmtop computers, personal digitalassistants (PDAs) and mass-marketed Internet access devices such asWebTV can be used. In addition, the hardware arrangement of the presentinvention is not limited to devices that are physically wired tocommunication network 106. Of course, one skilled in the art willrecognize that wireless devices can communicate with informationprocessors 102 using wireless data communication connections (e.g.,WIFI).

In addition to computer-related methods to access the system, partieswho are not able to access the control allocation system 100 via acomputer or related device can write physical letters, make telephonecalls or facsimiles to parties operating in accordance with the presentinvention. For example, after a letter and/or telephone call isreceived, data-entry personnel make the necessary entries into controlallocation system 100.

According to the present invention, user terminal 104 provides useraccess to information processor 102 for the purpose of receiving andproviding asset, state- and path-related information. The specificfunctionality provided by control allocation system 100, and inparticular information processors 102, is described in detail below.

Control allocation system 100 preferably includes software that performspath and state simulations (described in greater detail herein),calculates asset-related market values, including related to volatility(or other risk) of an asset, generates markets and provides controlsgiving an opportunity for parties to exchange rights and allocations,and preferably resides on one or more information processors 102. One ofthe functions performed by information processor 102 is that ofoperating as a web server and/or a web site host. Information processors102 typically communicate with communication network 106 across apermanent i.e., unswitched data connection 108. Permanent connectivityensures that access to information processors 102 is always available.

As shown in FIG. 2 the functional elements of each information processor102 or workstation 104, and preferably include one or more centralprocessing units (CPU) 202 used to execute software code in order tocontrol the operation of information processor 102, read only memory(ROM) 204, random access memory (RAM) 206, one or more networkinterfaces 208 to transmit and receive data to and from other computingdevices across a communication network, storage devices 210 such as ahard disk drive, floppy disk drive, tape drive, CD-ROM or DVD drive forstoring program code, databases and application code, one or more inputdevices 212 such as a keyboard, mouse, track ball and the like, and adisplay 214.

The various components of information processor 102 need not bephysically contained within the same chassis or even located in a singlelocation. For example, as explained above with respect to databaseswhich can reside on storage device 210, storage device 210 may belocated at a site which is remote from the remaining elements ofinformation processors 102, and may even be connected to CPU 202 acrosscommunication network 106 via network interface 208.

The functional elements shown in FIG. 2 (designated by reference numbers202-214) are preferably the same categories of functional elementspreferably present in user terminal 104. However, not all elements needbe present, for example, storage devices in the case of PDAs, and thecapacities of the various elements are arranged to accommodate expecteduser demand. For example, CPU 202 in user terminal 104 may be of asmaller capacity than CPU 202 as present in information processor 102.Similarly, it is likely that information processor 102 will includestorage devices 210 of a much higher capacity than storage devices 210present in work station 104. Of course, one of ordinary skill in the artwill understand that the capacities of the functional elements can beadjusted as needed.

The nature of the present invention is such that one skilled in the artof writing computer executed code (software) can implement the describedfunctions using one or more or a combination of a popular computerprogramming language including but not limited to C++, VISUAL BASIC,JAVA, ACTIVEX, HTML, XML, ASP, SOAP, and web application developmentenvironments.

As used herein, references to displaying data on user terminal 104 referto the process of communicating data to the terminal acrosscommunication network 106 and processing the data such that the data canbe viewed on the user terminal 104 display 214 using a web browser orthe like. The display screens on user terminal 104 present areas withincontrol allocation system 100 such that a user can proceed from area toarea within the control allocation system 100 by selecting a desiredlink. Therefore, each user's experience with control allocation system100 will be based on the order with which (s)he progresses through thedisplay screens. In other words, because the system is not completelyhierarchical in its arrangement of display screens, users can proceedfrom area to area without the need to “backtrack” through a series ofdisplay screens. For that reason and unless stated otherwise, thefollowing discussion is not intended to represent any sequentialoperation steps, but rather the discussion of the components of controlallocation system 100.

Although the present invention is described by way of example herein interms of a web-based system using web browsers and a web site server(information processor 102), control allocation system 100 is notlimited to that particular configuration. It is contemplated thatcontrol allocation system 100 can be arranged such that user terminal104 can communicate with, and display data received from, informationprocessor 102 using any known communication and display method, forexample, using a non-Internet browser Windows viewer coupled with alocal area network protocol such as the Internetwork Packet Exchange(IPX). It is further contemplated that any suitable operating system canbe used on user terminal 104, for example, WINDOWS 3.X, WINDOWS 95,WINDOWS 98, WINDOWS 2000, WINDOWS CE, WINDOWS NT, WINDOWS XP, WINDOWSVISTA, LINUX and any suitable PDA or palm computer operating system.

FIG. 3 shows a block diagram arrangement 300 of parties associatedtogether in accordance with a preferred embodiment of the presentinvention. In one embodiment, a proprietor 301 is one or more partieswho provide the present invention, including to control the manyfeatures set forth herein, in order to enable the parties illustrated inFIG. 3 to enter into contractual and binding agreements with each other.In one context, proprietor 301 may control information processor 102 inorder to provide access to computer-related data entry display screens,output reports, and analysis, such as described in greater detail below.In a preferred embodiment, assets are pledged by counterparties 302(302A-302D, FIG. 3) to capital funders 304, via funding agents 306 inexchange for capital. Funding agents 306 are preferably configured assoftware applications, but may take other forms, including asrepresentatives of a funder 304, and operable to process financialpayments, such as by interfacing with financial institutions or thelike. Preferably, however, agents 306 are automated processes and/orcomputer software applications.

Moreover, although many of the drawings and examples set forth hereinrefer to counterparties 302 and funders 304 as separate and distinctparties, the invention is not so limited. In various contexts, fundersare counterparties to contractual and/or financial arrangements.Further, given a particular context that is associated with acontractual and/or financial arrangement, borrowers of capital canevolve into lenders and back to borrowers over time (e.g., by extendingcredit) and in connection with various parties. Accordingly, use ofreference numerals, including 302 and 304 that represent counterpartiesand funders, respectively, is intended for purposes of illustration andnot meant to limit the invention by imposing strict contextualrelationships. Moreover, and as known in the art (and occasionally usedherein) and particularly with respect to one aspect of the presentinvention regarding term repurchase agreements, counterparties 302 thatpledge collateral assets to secure a loan are referred to as “sellers.”Therefore, and as recognized by one skilled in the art, variousnomenclature for identifying parties changes with respect to therelative relationships of the parties to each other, as well as withrespect to the relative contexts of financial, contractual or otherarrangements and agreements between the parties.

In addition to providing collateral assets to secure a loan with funders304, counterparties 302 preferably tender a payment, referred to hereinas a “margin” to funders 304. The margin amount is a deposit made bycounterparties 302 to funders 304 and represents a percentage of acalculated value of the pledged collateral. In accordance with apreferred embodiment, collateral is valued regularly and preferablyfrequently, for example, daily. In one embodiment, brokers/dealers 308perform services associated with valuing and/or disposing (e.g.,liquidating) collateral in the market 312. In one embodiment, verifiers310 are employed to ensure that brokers/dealers 308 operate asinstructed and/or to ensure that collateral is fairly valued bybrokers/dealers 308. Further, margins are preferably charged to eachcounterparty 302 and calculated regularly and frequently. Margins arepreferably calculated as a function of the value of collateral, and therelative volatility (or other risk) of collateral.

FIG. 4 is a block diagram that illustrates parties, assets and capitalin accordance with an embodiment of the present invention. Theembodiment shown in FIG. 4 represents a repurchasing arrangement,wherein counterparties 302A, 302B, 302C, 302D and 302E pledge collateral402A, 402B, 402C, 402D and 402E to funders 304A, 304B, pay a respectivemargin 404A, 404B, 404C, 404D and 404E and maintain margin reserves406A, 406B, 406C, 406D and 406E, which may require additional paymentsover time, as described herein. Moreover, a buffer account 408 ispreferably maintained for collateral 402A, 402B, 402C, 402D and 402Ethat is available for transfer, such as by disposal by broker/dealers308 to buyers 314A, 314B and 314C. In the example shown in FIG. 4,counterparty 302A has pledged the most collateral 402A, valued at $300M,while counterparty 302E has pledged the least, valued at $100M.Accordingly, counterparty 302A has paid the highest margin 404A, and,depending upon various market movements and other conditions, may haveto add to his margin reserve over time.

In one embodiment, after a period of time as agreed upon by the parties300, counterparties 302 preferably settle their commitments, for exampleby purchasing back their assets and to pay funders 304 back. Oncecollateral 402 is pledged and during the term of loan or otheragreement, potential buyers 314 of collateral 402 may offer bid pricesthat are lower than the value(s) of collateral 402 when originallypledged, or lower than the amount of money for which counterparties 302originally agreed to repurchase collateral 402. In case broker/dealer308 determines a lower value for collateral 402, then one or morecounterparties may be required to increase their respective margins. Inone preferred embodiment, that amount equals the initial amountcounterparty 302 promised to purchase collateral 402 minus the currentlyvalued price of collateral 402 minus the current margin reserve. When anewly calculated margin 404 is presented to a counterparty 302 and anamount required for the counterparty to contribute to its respectivemargin 404, counterparty 302 decides upon a course of action to takewith respect to collateral 402. For example, counterparty 302 may decidenot to contribute any additional capital to its margin reserve 406 forvarious reasons. In this scenario, counterparty's 302 collateral 402 maybe disposed by broker/dealer 308. Presumably, collateral 402 is sold fora lower amount than its value when originally pledged, and therefore aloss is realized and counterparty 302 incurs a debt. Alternatively,counterparty 302 may elect to contribute the amount to the marginreserve 406. In still another alternative, counterparty 302 may settlewith funder 304 by paying for its respective collateral 402 and endingthe its involvement in system 100.

Preferably, various models are employed that support a plurality offunders 304 and a plurality of counterparties 302. Notwithstandingcounterparties 302 treated by funders 304 as a single group,particularly for purposes of valuing collateral 402, each individualrespective counterparty 302 is responsible for its respective individualcontribution to the pool. For example, multiple counterparties 302together pledge a pool of collateral 402 and, similarly, counterpartiespledge a margin pool to funders 304. Counterparty 302A pledges $300Mworth of collateral 402 and counterparty 302B pledges $250M. Thecollective margin percent is 10%, and counterparty 302A contributes $30Min cash to its respective margin, while counterparty 302B contributes$25M.

At various times, including as contractually negotiated between parties300, one or more counterparties 302 may decide to settle with funders304 and end their involvement in system 100. Absent any penalty forearly termination or other initially negotiated cost, the cost fortermination preferably equals the purchase price that counterparty 302contractually promised to pay for collateral 402 minus the marginpledged by counterparty 302.

In a preferred embodiment, funders 304 track values of pooled collateralby employing inventory liquidators (i.e., brokers/dealers 308).Brokers/dealers 308 preferably generate markets for pooled collateral.Brokers/dealers 308 preferably estimate a value for collateral every dayand in the event of some need, brokers/dealers 308 preferably dispose ofcollateral 402, such as by auctioning collateral 402 to a highestbidder, in connection with a contingency. Preferably, appropriateincentives are provided to prevent broker/dealer 308 from undervaluingcollateral 402 and, thereafter, reselling collateral 402 at a mark-up orotherwise acting in its own interests to the detriment of funders 304 orcounterparties 302. Thus, incentive compatible situations are preferablycontractually agreed upon between parties 300, and provided to preventlow bidding or otherwise to prevent broker/dealer 308 from disposing ofcollateral 402 below market value.

As noted above and in a preferred embodiment, collateral 402 isregularly revalued, such as on a daily basis, and counterparties 302 andfunders 304 are notified of the value of the pool of collateral and ofthe contributions made by the respective counterparties 302. In case thevalue of the collateral, including individually pledged collateral 402or the collective collateral pool, is valued lower than the repurchaseamount, then one or more counterparties 302 are notified of thedifference with a request to add to one or margins. Each counterparty302 preferably has an individual and separate contractual arrangementand responsibilities with respect to the entire collateral pool.

In case one counterparty 302 elects not to increase its margin, then itscollateral 402 inventory may end up being transferred into a bufferaccount 408. Once in the buffer account 408, collateral 402 becomesavailable for sale. Preferably, a counterparty's margin is alsotransferred into buffer account 408 in case the counterparty'scollateral 402 is transferred. Once transferred into buffer account 408,the margin becomes available to support other transactions related tosettlement of the loan and/or the disposition of the respectivecounterparty's collateral 402. In case of disposition and a deficit isincurred, counterparty 302 is preferably issued an “I.O.U.” for thedebt. Typically, this occurs when there is a bad valuation of collateral402. In one embodiment, depending upon the terms of the contract betweenthe parties, funders 304 may impose a repayment schedule on acounterparty 302 at a high interest rate. Alternatively, funder 304 mayset a value, X dollars, that a counterparty 302 will pay in case amargin is not maintained, or that the counterparty 302 will pay apresent value of that ($X) amount at some future time.

In another and preferred embodiment, a counter-scenario regardingallocation of control rights is supported. In addition to tangibleassets pledged as collateral 402, intangible assets, such as oilreserves, thirty years of gold forwards, or the like are similarlypledged and actively managed by the systems and methods describedherein. In one example scenario, a counterparty pledges a lease on afleet of ships. Various unknown contingencies, such as freight rates,freight forward rates, spots rates or the like have a residual valuerate, which represents the value of the lease over time. In analternative example, a complete company securitization of cash flows andphysical assets can be pledged as collateral 402 in accordance with theteachings herein. For example, a complete so-called vertical chain canbe pledged that includes one or more company's cash flows and physicalassets. For example, a company may have rights to oil in the ground, andalso owns oil storage facilities, oil refinery equipment and oil tankerships for transporting oil. A sale and leaseback owned by a counterparty302 and based on an entire company may, accordingly, be pledged inaccordance with the teachings herein.

As will be evident to one skilled in the art, allocation of controlrights extends beyond disposition of property. Ownership of assets,whether tangible or intangible, can be parsed into residual value ofcontrol and rights to cash flows from the residual rights of control. Ina preferred embodiment, mechanisms are employed that operate toallocate/reallocate, distribute, weigh and measure respective rights ofcontrol of one or more assets pledged by an individual counterparty 302,as well as a pool of assets collectively pledged from counterparties302, from the gains realized as a function of the control.

In accordance with a preferred embodiment, a right or a contingent rightto control of one or more assets can be traded for actual cash flow or acontingent liability. A tradeoff of current cost benefits and regularlyor dynamically updated discounted present value of future gains andbenefits, depending upon contingent paths and states. In one embodiment,a determination of contingent states and paths is made by employing oneor more formulaic strategies, such as known dynamic programmingequations or “Bellman” Equations, and/or Nash Equations as known in theart, to calculate the probabilities associated with contingent paths andstates, including of counterparties 302, nature, market forces or otherrandom or stochastic events and conditions. Preferably, calculations areperformed to identify and/or predict path and state contingencies for aplurality of parties who having different interests over time. Thepredicted contingencies are preferably used by counterparties 302,funder agents 304, brokers/dealers 308 or others associated with thepresent invention, in order to calculate values of contingent controlrights, current cash flow and a relationship there-between.

As noted above, a counterparty 302 may elect to opt out by, for example,settling with a funder 304 and extracting collateral 402 from the poolof collateral. In such case, the respective counterparty 302 may pay anopt-out fee, and the overall pool of collateral shrinks, accordingly. Insuch case, it may be that massive repercussions on the remainingcollateral in the pool are incurred by removal of the respectivecollateral 402. The impact may be that overall margin reserve amounts inthe pool have changed, requiring that the remaining counterparties 302have to add more capital to their respective margins. One reason forsuch repercussions is that the remaining collateral in the collateralpool, i.e., the collateral in the pool that was not removed by theopting out counterparty 302, is more volatile and subject to greaterfluctuations in terms of current cost benefits, than collateral 402 thatwas removed. In such case, a recalculation is performed, for example,via broker/dealer 308, an automated process operating on informationprocessor 102, or the like, and counterparties 302 are notified that anadditional outlay to their margins is necessary.

Broker/dealer 308 may have varying kinds and degrees of responsibility,depending upon a particular embodiment implemented by proprietor 301. Incase, for example, an automated process operating on informationprocessor 102 calculates probabilities associated with variousstochastic paths and states with respect to collateral 402,counterparties, nature, the market, or other forces, broker/dealer 308may operate as an order taker following receipt of instructionsgenerated on information processor 102. In an alternative embodiment, averifier 310 is employed to oversee operations of broker/dealer 308. Insuch an embodiment, broker/dealer 308 may operate merely to takeautomated orders output, for example, from information processor 102 tosell collateral 402. After collateral 402 is ordered to be disposed ofby broker/dealer 308, verifier 310 preferably ensures that collateral402 is actually disposed of according to the terms set forth in theinstructions. Verifier 310 operates, for example, to ensure thatbroker/dealer 308 does not deviate from a process or that broker/dealer308 does not attempt to act to its own benefit and to the detriment ofothers, such as by undervaluing collateral 402, and cutting a side dealwith a third party for a profit. Thus in an embodiment, broker/dealer308 operates as sort of auctioneer by receiving an order to generate amarket for collateral 402, and to sell collateral 402 to a highestbidder. Verifier 310 preferably verifies completion of a disposition,and ensures that broker/dealer 308 properly adheres to rules during thedisposition process.

In accordance with a preferred embodiment, counterparties 302 typicallysettle with funders 304 at the completion of a deal. Alternatively andas noted above, in case counterparties 302 elect or otherwise do notincrease their respective margins, then respective collateral 402 isdisposed.

In accordance with a preferred embodiment, solved across one or more ofa series of Bayesian models, Bellman equations and Euler conditions,stochastic views for each respective player (e.g., counterparties 302)can be determined. Moreover, by applying various game theoreticmethodologies, such as a Kernel or Core, can be uncovered whereineveryone's optimum meets, thereby ensuring that contractual terms forand between the various parties are provided that will be amenable toall involved. Alternatively, in case one or more terms are not amenableto one or more parties to an agreement, the contractual terms arepreferably chosen such that bargaining between the parties is supportedfor one or more provisions, without departing from the overall spiritand impact of the agreement. Preferably, then, a set of rewards andvalue functions are provided that relate to decision paths making rulesthat apply for stochastic conditions, referred to herein, generally, as“stochastic dominance.” The rules operate across all (or nearly all)possible states and all (or nearly all) possible decision paths, and aredeveloped to be agreeable to all parties, in order to conform to eachparty's anticipated respective states and paths.

In one embodiment, the present invention provides for an evolutionarystable equilibrium (“ESS”) as a solution method for dynamic andendogenous interdependencies between diverse counterparties 302 overtime. For example, counter parties 302 may enter or leave system 200 inaccordance with various conditions that occur over time. Complexscenarios involving multiple funders 304, multiple funders 304, andmultiple counterparties 302 with respect to a highly diversified pool,of collateral is preferably supported and well managed by the teachingsherein. Moreover, the invention supports the complex interrelationshipsbetween the parties, and across the tangible and intangible collateral402 managed thereby. The systems and methods herein manage the variousrelationships of the parties including as each party's behavior impactsanother. Within the complex set of rules and procedures applied tomeasure stochastic outcomes, each party finds a respective place.Preferably, this occurs as a function of (relatively) simple NashEquations, as known in the art, thereby employing an analyticalapproximation to find an evolutionary stable equilibrium. Depending upona particular embodiment or implementation, for example, by proprietor301, more complex formulaic approaches may be employed, such as withpartial differential equations and finite difference methods todetermine a reasonably robust analytic selection that satisfies thegroup, the thresholds around acceptability among the individualcounterparties 302 or the group of counterparties 302.

In case proprietor 301 determines that it is unlikely that such anoutcome is likely or even possible using an analytic approach orselection, a more numeric approach is available. For example, thepresent invention preferably supports Bayesian models in order tocontinually adapt to and update around conditional probability.

For example, conditional probability and corresponding numericapproaches, such as Bayesian models, are particularly suited forconsidering and calculating the evolution of each counterparty'srespective states and paths of adaptive decisions. Accordingly, thecombination is useful for determining what is going to be conditionalvalues of each party's payoff amount (i.e., a settlement amount or anewly calculated margin amount) given a particular state and particularpath.

In view of the varying expectations and beliefs with respect to aconditional value of a particular state, the present invention supportsa unique flexibility by enabling counterparties 302 to exchangepositions or paths, based on their differences of belief, at aparticular stage in the process. Preferably, counterparties 302 exchangepaths and states as a function of a set of rules that are implementedand agreed to in advance.

In one embodiment, an opt-out function is employed that imposes atermination penalty, such as a fee, on any counterparty 302 that electsto settle with funders 304 in advance of a predetermined date, or incase a counterparty 302 foregoes contributing to its margin, forexample, to account for a decrease in the value of that counterparty's302 collateral 402, and/or in case the value of the pool of collateralhas decreased. Preferably, stochastic conditions are predicted as afunction of one or more calculations, such as described above, and theparties contractually agree to early termination penalties based on, forexample, an entire service of potential paths and states, depending upona counterparty's 302 history with respect to the process, and based uponthe possibilities and how a counterparty's 302 expectation of thefuture, a counterparty 302 can pay a pre-calculated amount for theopportunity to exchange paths and states with another counterparty 302.

It is recognized by the inventor that the path-switching functionsupported by the present invention may involve significantly complexarrangements. For example, when two counterparties 302 that own largecorporate entities agree to exchange paths and states, thecounterparties 302 are actually exchange each other's past, present andfuture. In case of an equity swap, for example, at least a portion ofthe transfer price represents the exchange of a company's past and atleast a portion represents the exchange of the company's future. Byemploying the systems and methods described herein, the respective pathsand states are more accurately predicted and, further, counterparties302 explicitly agree to terms for such exchanges as a function of thecalculations and the actual paths and states the counterparties 302have. The present invention supports a more rigorous approach to suchexchange than that supported in the prior art, and, accordingly, reducesthe likelihood of loss and other shortcomings associated with largecorporate transfers.

Further, the systems and methods described herein are particularlyuseful for counterparties 302 involved in a path-/state-exchange,including related to complex option trades, section 1031 tax deferredexchanges of stock. The invention is further useful for complexexchanges related to durable and intangible portfolios of interdependentassets, such as corporate activity involving power generation, naturalresource development, and utilities. Particularly, cost structures goinginto the future, historical data analysis and based on certain forwardlooking markets, the present invention can generate contractual terms,including prices, that reflect and take into consideration variousstates and decision paths of the respective parties. Accordingly,contractual terms preferably change depending upon various conditions.

For example, two companies are considering an exchange. At least one ofthe companies owns a fleet of ships and has inventory that include bulkcarriers, liquid natural gas ships, trampers and liners for oil tankers.The other company has inventory that is comparable in value. The variousparties typically have varying interests and intentions. For example,the party receiving the ships may decide to take the corporation in anew direction. Alternatively, the receiving party may intend to stay inthe industry, but is going to make a long term be on how demand willevolve, and accordingly, relative values, regarding trampers versus drybulk carriers, etc.

Thus the present invention supports counterparties that effectivelyrebalance entire portfolios of assets around a balancing of a company'scontingent control rights and contingent rights of disposition. Inaccordance with the present invention, contingencies and conditions arepredicted, such as how the freight rates markets evolve relative to howthe salvage markets evolve.

In typical transactions in accordance with the present invention,ongoing contractual relationships are forged and the situations thatemerge represent arrangements where compatible and on going investmentsof money and time. The inventories are preferably tied together bycontractual arrangements, are difficult to unravel, difficult to reverseand ensures that one counterparty's 302 activity impacts one or moreother counterparties 302.

Although the present invention has been described with reference to aterm repurchase agreement that involves pledging collateral 402 tosecure a loan and paying back the loan, effectively repurchasingcollateral 402, the present invention is not so limited. A discussionregarding an application of search and matching in connection with analternative embodiment, as well as for supporting various contingenciesand addressing impacts parties have on each other as they operate in themarketplace is now provided.

A plurality of retail companies operate in the garment business and areplanning for the next season's fashion trends. For purposes ofsimplicity, only two types of clothing are available for purchase:platform shoes and leisure suits. Further and for purposes ofillustration, the only available color options for the leisure suits arelime green or banana yellow. Further, the only material choices for thesuits are silk and polyester. With respect to platform shoes, the onlymaterials that are available are anaconda snakeskin or vinyl. The silksuits and anaconda shoes are expensive, while the polyester suits andvinyl shoes are much less so.

Continuing with the present example, at Time( ), each company has todecide whether to purchase leisure suits, platform shoes, or somecombination thereof. Also, the companies must elect respective styles,colors and materials. None of the parties are able to predict the futureand know in advance what will be popular. It may be, for example, that awell-known celebrity influences the market by wearing a silk leisuresuit with anaconda snakeskin shoes. The seller who purchases silk suitswith anaconda shoes for resale, before that particular combination is inhigh demand, covers his costs and makes a significant profit. If, on theother hand, that combination is not in demand, then the seller whopurchases silk suits and/or anaconda shoes will have huge losses. Theseller who purchase polyester suits and/or vinyl shoes will suffer amuch lower loss in case that trend is not popular. However, the sellerof polyester suits and/or vinyl shoes does not stand to make as muchprofit because his mark-up is not as high. Therefore, as with virtuallyall business ventures, there a cost benefit analysis is desirable tooffset losses while ensuring profits.

In accordance with the teachings herein, some estimation or predictionof fashion trends is possible. For example, the likelihood ofinfluential parties promoting fashion may be determined. Further, theavailability of credit, and hence the ability for consumers to affordthe higher priced fashion, can similarly be predicted. Using some of theprobability determiners, such as described above, at least a partialdetermination or prediction of the future can be made.

Continuing with the present example, it may be that consumers only wantto purchase packages of suits and shoes, together. In the presentexample, one seller purchases only lime green silk suits, while anotherparty purchases only vinyl shoes. Therefore, the companies in themarketplace must cooperate with each other to buy and sell their goodsto each other and formulate packages of suits with shoes. Alternatively,it may be that orders, when received, were incomplete. For example, onlyleft shoes were received by seller A, and only right shoes were receivedby seller B.

The present invention preferably requires that contractual rules to beagreed upon by parties, including for side payments, that may be made toexchange inventory. In connection with the above example, those sellersthat only received right or left shoes, or that require packages ofsuits and shoes, must cooperate jointly tie each other to contractualarrangements. Moreover, the relationships and contractual commitmentsprovided in accordance with a preferred embodiment of the presentinvention preferably require an initial commitment that cannot beentered into in a trivial way, nor can the relationships be reversedeasily.

Significantly, the present invention ensures that actions taken, forexample, by one counterparty adversely affects other counterparties 302.If too many people dispose of their collateral 402 too quickly, thencounterparties may be negatively affected, such as by causing the priceof pooled collateral to drop to severely and quickly. Parties have noneed, therefore, for prior art inter-creditor agreements or the likethat impose checks and balances on parties to prevent certain kinds ofbehavior. In accordance with the present invention, such provisions oragreements are unnecessary because, as built into the system,counterparties 302 experience pain because of a correlated or sharedimpact that occurs when one counterparty 302 drops out. As long asindividuals pull collateral 402 from a pool slowly, then the overallvolatility of the collateral pool is not affected.

In case, for example, one counterparty 302 has contributed the mostcollateral 402, percentage-wise in terms of volume, value, or both, to acollateral pool, then that counterparty 302 will likely have the highestmargin to pay. In other words, counterparty's 302 margin will be afunction of both the relative size of his contribution and the relativeimpact of his contribution in terms of state dynamics (e.g.,volatility). In case the counterparty 302 slowly removes his collateral402, for example, by paying off his debt and without adversely affectingthe volatility of the pool or causing a low price impact, then the othercounterparties 302 should not be adversely affected. Preferably and inaccordance with a preferred embodiment, during a scheduled recalculationof the collateral in the pool, the remaining balance of collateral iscalculated and the other parties may have increased margins, or may not.In either case, the remaining counterparties' 302 obligation is pro ratawith respect to their respective collateral and their margins, anddepending upon the diversifying effect of the one counterparty 302pulling his collateral 402 from the pool, the remaining parties' marginsmay change. In other words, the remaining counterparties 302 have a newset of rules where they may have increased margins because of changes inthe diversification of the collateral pool. The volatilities, values andcorrelations between the assets are preferably recalculated, and eachparty is informed of his respective margin, accordingly.

Moreover and in a preferred embodiment, broker/dealer 308 observes howprices on the individual assets in the collateral pool move together.Each counterparty's 302 margin depends, at least in part, upon thevolatility of that respective counterparty's 302 asset. When collateralassets are pooled and the parties are cross collateralizing, the marginsare calculated as a function of each counterparty's 302 individualcontribution and some component of the correlation of those movementswith others. Preferably, the invention is structured to impact theimplicit rate that counterparties 302 are charged when they buy backtheir assets (i.e., pay off their debt), or the invention is structuredto impact each counterparty's margin amount, or some combination of thetwo. For example, a counterparty 302 can be charged a little less on therate to purchase back his collateral 402 asset(s), and that counterpartypays more into his margin, e.g., for the correlation of his asset inconnection with the others in the collateral pool.

Preferably, rules are formulaically established prior to counterparties'302 commitments, as a function of control variants or decision rules. Asdescribed above, control variants preferably account for variouscontingencies, such as in case a counterparty 302 settles with thefunder 304 and pulls out his collateral 402, or in case some eventoccurs that causes the future to unfold in a particular way. Inaccordance with the respectively calculated contingencies, variouscontractual obligations are established, such as to pay into anincreased margin. The invention provides that regular and frequentrecalculations of the relative values, volatilities and conditions ofcollateral 402 are performed which may result in new valuations andduties imposed on counterparties 302. Each counterparty 302 preferablycommits to abide by rules imposed as a function of simulated statesand/or paths calculated, such as described above, using known methods.In accordance with the teachings herein, counterparties may elect toabide by the contractual terms, opt out, or may bargain with anothercounterparty 302 to switch paths. The other counterparty 302 may haverecently experienced a significant state-/path-/change such that apath-/state-exchange looks attractive, even though a margin increasewill be imposed when the exchange occurs.

In accordance with an embodiment, counterparties 302 that exchangepaths, i.e., positions relative to funders 304, do not necessarilyexchange ownership of collateral 402 pledged to funders 304 at the endof the loan or other agreement process. In one embodiment, theexchanging counterparties 302 contractually agree to be responsible foreach other's payment and other responsibilities during the term of theagreement. Therefore, as collateral and/or collateral margins arerecalculated, each counterparty 302 is responsible for the other'srespective payment requirements, as well as to be entitled to theother's various rights, including cash flow rights stemming from theother counterparty's 302 state-dependent residual rights of control.Accordingly, in one embodiment, counterparties 302 do not swap assets,but instead exchange responsibilities and cash flow rights.

Significantly, the present invention accounts for counterparties' 302respective residual rights of control in connection with assets,including intangible and tangible assets. As used herein residual rightsof control refers, generally, to rights to manage assets andcorresponding rights to the assets, including rights to income generatedby the assets, rights to lease or assign the assets, rights to developthe assets, rights to commercialize the assets, etc. These rights tocontrol the assets are treated differently by counterparties 302 thanthe rights to capital that is generated by selling the assets.Accordingly, counterparties 302 may have different interests,expectations, goals and intentions with respect to either rights tocapital raised by disposing assets versus residual rights to controlassets.

The various simulation processes and operations employed in the presentinvention to predict a plurality of state- and path-related outcomesaccording to various conditions have an impact for counterparties 302with respect to each counterparty's residual right of control assets.This is because residual rights of control of assets is state-dependent.Therefore, simulations of a plurality of states directly impactpotential residual rights of control.

An example illustrating counterparties' 302 residual rights of controlis now provided with regard to the marine hull insurance space. Thereexists a balancing between various variables, including fuel prices,freight rates and the degree by which assets get used and maintained.Accordingly, the frequency and severity of marine insurance policyclaims against policies held by policyholders exist in state-dependenttrends. In certain states, policies effectively become a Put of theresidual value of a marine vessel to the insurance company. This occurswhen, for example, there is high demand for a ship and the ship isextensively used and generating income. In such case when demand forships is high, fuel prices rise correspondingly. Also, in time whendemand for ships is high, policyholders may elect to scale backmaintenance, thereby reducing capital outlay associated with maintaininga ship. Also, it may be that policyholders are paying fixed leaseamounts, perhaps with some additional, albeit minor, variable amount.Thus and in accordance with one particular state, policyholders enjoyrelatively high profits as a function of their residual rights ofcontrol, and pay relatively fixed, predictable and relatively low costs.The ships, however, physically deteriorate during the term. At the endof the term, the policyholders claim a total loss and the insurancecompany is left to pay on their claims.

In the above example, a trade-off arises between the future of value ofan asset, i.e., a ship, and the current cash flows generated by theasset. In the previous example, the present value of the lease issignificantly higher than the residual value of the ship in the future.Effectively, the policyholders (e.g., the captains of the ships)transfer their respective risks in their assets to the insurancecompany/companies. A balancing test based on the stochastic states andpaths for each policy holder results in a decision to pay higher fuelcosts and make high revenues, rather than preserve the value of theasset. This example illustrates a trade-off between residual rights ofcontrol of an asset (i.e., what is done with the ship) and the futurevalue of the asset. Insurers and policy holders does not know at timeperiod T what other variables, such as freight rates, are going to beten years into the future.

In accordance with a preferred embodiment, however, simulations canoperate to determine future freight rates and fuel prices given futurestochastic states, and policy holders can use that information tobalance the relationship between the possible rates and the possiblevalue of the ship at the end, for example, a lease term. In case, forexample, an alternative state is simulated, in which freight rates arelow, fuel prices are similarly low (due at least in part to low demand)and low income earnings, then decision paths regarding maintenance,operations and preservation of the asset may be very different becausewhile the present value of the asset may be very low, the possiblefuture value of the ship is very high given that at some point in time,states could change. One innovation of the present invention is thatsimulations and various path/state conditions are simulated for manyassets, such as fleets of ships, as opposed to a single asset or oneship.

The level of complexity associated with managing tradeoffs betweenresidual rights of control and future value of many assets, for manyparties and given many conditions impacting various states is handled bya series of complex simulations, probability calculations and outcomes.Further, the invention involves tying assets and responsibilitiestogether such that a shared liability and shared benefit among aplurality of counterparties 302 emerges that promotes and precludesvarious types of behavior. The system and methods described herein arehighly representative of the way the world actually operates, therebyproviding simulated outcomes given possible conditions and enablingcounterparties 302 to agree to contractual terms and duties that will beacceptable and can be adhered to by all, prior to entering into bindingagreements.

The example above regarding the marine hull insurance space focuses onpolicyholders shifting risk to insurance companies. One skilled in theart will recognize that insurers will likely agree to conditions inwhich policyholders are entitled to transfer all of the risk to theinsurer. Using the systems and methods herein (in connection with theabove example), insurers and policy holders preferably reviewcontractual terms based on simulated path- and state-dependent outcomesprior to agreeing to terms, and bargain to reach a balancing betweenduties and benefits that is acceptable to both parties.

Although the present invention has been described largely in terms ofminimizing, precluding or avoiding adversity as a function ofcontractual ties to pooled collateral and contingent rights of controlof assets, the invention is not so limited. It is envisioned thatcollateral and return thereon is preferably optimized in accordance withthe teachings herein. For example, counterparties 302 preferably haveincentive to contract in accordance with the invention to enjoy benefitsof a lowered implicit interest rate as a function of pooled collateral.Although each counterparty's 302 margin is based on the respectivecollateral 402 pledge, based, for example, on the value of collateral402 and the volatility of the collateral 402, the diversification of theentire collateral pool advantageously affects the interest rate of therespective counterparty's 302 collateral 402.

FIG. 5 is a state diagram representing a plurality of parties and aplurality of transactions 500 over time. As shown in FIG. 5,counterparties 302 (shown as “M parties”), with common information I andprivate information Ø_(m), precommit to transact over the period fromdate to T, by pledging at t_(o) their respective capital endowment,E_(o). All parties observe each state k_(t), and transact at each date(decision node) in accordance with their utility function and based upontheir expectations (computed rationally from 1 and Ø_(m)) regarding thepath of future states from t_(n) to T.

FIG. 6 illustrates conditional payoffs 600 for each counterparty 302illustrated in FIG. 5 in connection with possible states. For eachcounterparty 302, each state results in a path j_(m) of conditionalpayoffs p_(m), based upon each party's 302 previous path oftransactions. The method enables parties to implementincentive-compatible, optimal strategies for trading paths andcumulative payoffs in the presence of sequential irreversibility ofindividual paths (i.e. path-dependence) to maximize state-dependentutility across the parties.

Preferably functional component mechanisms are supported, along withdevices comprising known processes including, for example, coordinationand enforcement mechanism(s), (Bayesian) multiperiod decision modelswith alternating choice (and adaptive utility), verification mechanisms,inspection devices, general participation constraints, mechanismselection process/criteria, nonlinear multidimensional pricingschemes/functions, contingent decision nodes and option values to reducedimensionality. Further, the present invention supports side-payment,penalty, and reservation-value functions, such as to addresscost-benefit tradeoffs. Moreover, sequential strategy and path-switchingfunctionality via distributed search and bargaining, and dynamicmatching is preferably supported. Moreover, the present inventionpreferably supports messaging, including sender-receiver messages andcompact search representations in complex domains (e.g., informationaland procedural data compression).

The above-identified components are preferably operatively classifiedwithin five fundamental functional groupings:

1) Contracting: the invention preferably supports incentive-compatiblepre-commitment, coordination, and enforcement mechanism(s).

2) Observation, verification and validation: the present inventionpreferably supports monitoring and verification mechanisms, as well asinspection devices.

3) Bargaining: Preferably, general participation constraints andmechanism selection process/criteria are supported by the presentinvention.

4) Probability/Decision Value/Utility Mapping: Preferably, the presentinvention supports contingent decision nodes and option values to reducedimensionality. Further side-payment, penalty, and reservation-valuefunctions, such as to address cost-benefit tradeoffs, are furthersupported.

5) Matching/Transacting. Preferably, sequential strategy/path-switchingfunctions are supported via distributed searching/bargaining and dynamicmatching. Moreover, messaging (i.e., Sender-Receiver) is supported, asare compact search representations in complex domains, such as viainformational and procedural data compression). Moreover, phase andstate transition functions are preferably supported.

FIG. 7 illustrates paths 700 associated with functional software agents702A, 702B, 702C and 702D that operate to employ a variety of functions,mechanisms, and devices. Software agents 702A-702D preferably mapobjective states to subjective or “conditional” probabilities.Preferably, the conditional joint probability distributions are mappedas conditional expectations onto conditional utilities, which are thenmapped onto conditional payoffs. The result is a contingent payofffunction, which may be represented as a multi-dimensional surface (i.e.a manifold) comprised of paths of “conditional” state-dependentoutcomes. For example, and as shown in FIG. 7, the “conditional”state-dependent outcomes include conditional private expectations,conditional decision weights and payoffs.

FIG. 8 illustrates agents 702 transacting on behalf of each transactingcounterparty 302, in accordance with a preferred embodiment. As shown inFIG. 8, information intermediary 802, enforcement mechanism 804,verification mechanism 806, and contingent contract bundles 808 areprovided. Preferably, contingent contract bundles 808 representbilateral agreements between agents 702 participating in thesystem/process.

FIG. 9 illustrates component aspects of agents 702, in accordance with apreferred embodiment. Each agent 702 preferably comprises components forsupporting the teachings herein. As shown in FIG. 9, three accounts areprovided including an endowment pledge account, a margin reserve, shownin this case as a “spread” reserve, as known in the art), as itaccumulates, and a contingent payoff account to support gains or lossesin connection with disposition of collateral 402. Further, a library ofhierarchical contractual and procedural rules, which are subject todynamically change and evolve, is preferably analogous to contingentcontracts is supported. Moreover, a utility function for determiningsubjective, probability and decision states (shown as weights or “wgts”)is provided. Moreover, a contingent payoff function is preferablyprovided. Also shown in FIG. 9 is a computing engine that preferablyperforms estimation, forecasting, inference, simulation and optimizationoperations. Moreover, messaging is supported, including sender andreceiver signaling and messaging. Further, search engine technology isfurther provided to support searching and matching functionality.

FIG. 10 illustrates an interaction 1000 between two or more agents ageneral list of mechanisms, functions and devices 1002 provided inhierarchical contractual rules (FIG. 9) associated with an agent 702.The contractual rules preferably comprise a library of hierarchicalrules and procedures embedded within each bilateral agreement betweenany two (or more) transacting counterparties 302 and their respectiveagents.

In connection with mechanisms, functions and devices are provided incontractual rules associated with each agent. For example, one or moreof the following is implemented: coordination and enforcementmechanisms; (credible) signals; correlated equalibria mechanisms:triggers/thresholds; precommitment mechanisms and incentivecompatibility criteria; reserve requirements (stochastic storage);verification/inspection right rules; general participation constraints;and opt out function. Other functions and mechanisms employable byagents includes mechanism selection criteria: non linearmultidimensional pricing schemes/functions (priorities,capacity/intensity); division of surplus (gains/losses) from tradesversus transfers of control trade-off functions; side payment, penalty,and reservation value functions (cost-benefit trade-offs); and strategicstrategy/path switching option pricing functions.

Examples of transactions, instruments and applications are providedbelow: complex insurance, hedging, and funding (repo, swaps, etc.)activities. Specialty Finance, Structured Insurance, Alternative RiskTransfer (“ART”), Finite/financial reinsurance and tradeable insurance,Insurance derivatives, Insurance wrapped defeasance account (stablevalue, Guaranteed Investment Contract or “GIC”) with conduit financing,Counterparty credit netting activities/vehicles: (collateralized creditsversus debits with credit intermediation, e.g. structured bank liquidityor financial guarantees as capital (operational risk policy, surety,performance bond) to pay as claims come due, Customized risk overlaysreference portfolio with derivative instruments overlay, Referenceindices, baskets or portfolios that may involve life(mortality/longevity), equity, futures, indices/baskets; Industry LossWarranty (“ILW”), Catastrophe Risk Swap (“Cat Swap”)/option, treaty,indemnity, GIC, etc.

The present invention is also applicable for designing, operating andmaintaining (as Complex Adaptive Systems), the any netting arrangementinvolving multiple counterparties, especially which may involve assetilliquidity, regime shifting of the market environment, andinformational asymmetries: Electronic Clearing Networks(“ECN's”)/Electronic Trading Markets (e.g., Derivative Exchange TradingFacility or Derivative Electronic Trading Facility (“DETFs”) involvinginsurance, hedging and funding (repo, swaps, contracts-for-synthetics,etc.), credit/trade credit facilities and/or collateral mgmt programs(Business-to-Business (“B2B”), 3PL Third-Party Logistics (“3PL”)applications; integrated Straight-Through-Processing,reconciliation/settlement systems); netting arrangements with multiplecounterparties for auctions; self-financing risk intermediation vehicles(conduits, swap and repurchase agreement (“repo”) netting facilities,derivative product companies, structured investment vehicles, insurancecaptives and transformers, clearinghouses, etc).

In general, the present invention is applicable to any capitalintermediation platform involving bundles of insurance contracts,master/netting arrangements, back to back financial instruments (e.g.swaps, options, repos, futures/forwards, CfDs, etc), Letters of Credit(“LCs” or “LOCs”), guaranties, warranties, receivables, as well as othercash or contingent liabilities. In conjunction with conventionalasset/liability management systems and economic capital allocationmodels for netting and offset of multi-lateral financial claims (i.e.risk-bearing capacity) within financial intermediation/tradingenvironments and structured investment vehicles, the process is intendedto more perfectly match sequentially-linked contingent claims and hencemore completely span states of nature, thereby substituting moreeffectively matching contingent claims for paid-in capital, in order tominimize the amount of capital, and the related the cost of maintainingreserves, required to support transactions within these environments.Hence this process also includes a method for imbedding liquidityoptions into financing structures, applicable to a broad range ofmulti-lateral contingent capital structures with application to theactive management of assets and liabilities for self-financing riskintermediation vehicles and facilities (conduits, SwapCos, etc.).

Referring now to FIG. 11, a timeline of steps S100 is described thatincludes example steps associated with pre-commitment, commitment,pre-closing, purchase, facility tenor, termination and post terminationperiods.

Step S102: Pre-commitment Period: Generally between ten-fifteen businessdays: 1. Funders and/or sellers review Global Master RepurchaseAgreement (“GMRA”), Custodial Undertaking (“CU”) (i.e., a supportingschedule for the GMRA), and Supporting Annexes II, as known in GMRA & Irepurchase agreements. 2. Sellers submit pool-cut for model tie-out byconduit managers, collateral agents, funders, and other vendors to theconduits. 3. Conduit manager negotiates eligibility requirements/max.concentrations with funders and/or agencies 4. Conduit Managernegotiates pricing rate/tenor tradeoffs, notification periods, cureperiods, termination triggers, and orderly termination/liquidationprocedures with Funders. 5. Conduit Manager negotiates pricing,discretionary substitutions, and over-collaterization levels forSellers' collateral pool. 6. Funders and/or Sellers begin documentingaccounts/establishing operating procedures with CA/Custodian Bank(Pre-closing process begins).

Step S104: Commitment Date: Generally one day. 1. Funders execute GMRA,CU, and Supporting Annexes I & II with Owner. 2. Funders' GMRAs, CUs andSupporting Annexes escrowed with Custodian Bank. 3. If commitment is‘pre-funded’, Funder transfers funds to respective Funder account fordisbursement on Purchase Date, once conditions for closing aresatisfied; if commitment is ‘unfunded’, then Funder transfers funds torespective Funder account on the Purchase Date for disbursement, onceconditions for closing are satisfied. (Pre-closing process completed).

Step S106: Closing Date (initial Purchase Date): Generally 1 Day. 1.Funders advance Purchase Price to Custodian, if commitment unfunded. 2.Custodian transfers Purchase Price to Funder's Account. 3. ConduitManager and verification agent (“VA”) tie-out model estimates of OC withFunders and Sellers for Purchased Securities to be transferred to theCollateral Account. 4. Pursuant to instructions of paying agent (“PA”)under collateral administration agreement (“CAA”), Custodian disbursesfunds from Funder's Account as advance to fund Purchase Price ofPurchased Securities in Collateral Account. 5. VA verifiesreconciliation of eligible collateral transfers/fund flows/payments andmargin compliance based on activity report provided by Paying Agent,Custodian, and CAA. 6. Counsel affirms validity of required opinions(enforceability, security opinion, tax). 7. Conduit Manager reaffirms VAreconciliation of collateral transfers/fund flows/payments and margincompliance based on activity report provided by Paying Agent, Custodian,and CAA.

Step S108: Funding Period (Stated Tenor of Facility): Generally greaterthan or equal to ninety days. 1. At the end of each business day, CAcalculates the daily market value of Collateral Account, based on priorbusiness day's end-of-day closing price from the pricing source for eachPurchased Security in Collateral Account and adjusts the DailyCollateral Levels to conform to the Collateralization Tests, bytransferring Cash Equivalents between the Margin Accounts and MarginReserve Accounts. 2. Conduit Manager affirms the validity of the DailyCollateral Level Adjustments, and in the event of a pricing disparity ordispute submitted by Funders or Sellers, facilitates the timelyresolution of the dispute between Funders, Owner, and Sellers. 3. In theevent of a Collateral Level Deficit, Conduit Manager facilitatescommunications between Seller PBs, Sellers, and CA regarding remedies byOwner/Seller (margin calls, substitutions, partial repurchases). 4. Inthe event of a ‘Failure to Cure’, Conduit Manager coordinates modeltie-out, and facilitates communication between Funders, Seller PrimeBrokers (“PBs”) Sellers, and CA regarding remedies by Funders (partialliquidations) 5. In the event of discretionary repurchases Owner'sand/or Seller's Calls or substitutions by Sellers, Conduit Managercoordinates model tie-out, and facilitates communication between CA,Sellers, Seller PBs, and Funders. 6. In the event of ‘EarlyTermination’, Conduit Manager facilitates communication between CA,Sellers, and Funders regarding repurchases and orderly liquidation ofPurchased Securities in the Collateral Account, and transfers of cashequivalents between accounts by custodian based on instructions in theGMRA, CU, and respective supporting Schedules.

Step S110: Early Termination: Generally, fifteen, twenty or twenty-fivedays. Upon Owner events of default, downgrade of Custodian Bank,‘Persistent Failure to Cure’, and violation of early termination triggerdue to extreme and/or persistent decline in the market value of thecollateral account i.e., generally 35%, Conduit Manager will coordinatewith CAA to facilitate the orderly liquidation procedures outlined inSchedules X, Y, Z.

Step S112: Stated Termination (‘Stated Repurchase Date’): Generally 1day. On the Stated Repurchase Date (and during the pre-terminationperiod leading up to the Stated Repurchase Date), Conduit Managerfacilitates communication between CA, Funders, Seller PBs, and Sellersregarding the following termination procedures as outline in SchedulesX, Y, Z: 1. Custodian collects advances due to repaid by Seller PBs tothe Funders and directs the pro rate shares to the Funders' Accounts,amounts due to the Funders. 2. Upon verification by Funders' agents offull repayment of any and all amounts due, Funder releases its securityinterest in the Purchased Securities in the Collateral Account 3. Uponinstructions from CA, Custodian releases remaining collateral toSellers.

The following describes project specifications, in accordance with apreferred embodiment that include two example metrics to calculateportfolio risk.

Metric 1: Value at Risk (“VaR”). The VaR metric preferably uses thefollowing inputs: (a) confidence interval (∝), (b) the time horizon overwhich the portfolio would be held (T), (c) number of simulation runs (N)(d) number of paths/run of simulation (m=100 by default).

The output is the VaR, which is equal to the average estimate of thepercentage drop in the value of the portfolio (from the initial value ofthe portfolio). The confidence level (∝) is preferably used to read offthe (m*∝)th worst percentage drop in the value of the portfolio out of mpaths in each simulation run. Thus in any particular simulation run, theportfolio value at the end of the time horizon (T) is computed over them paths. These m paths are preferably sorted in an increasing orderbased on their portfolio returns. The (m*∝)th return based on this sortis the VaR number for that particular simulation. This VaR number ispreferably averaged over the N simulations to calculate the average VaRvalue. The standard errors of the VaR numbers obtained in eachsimulation are also preferably reported.

Metric 2: Threshold Persistence (TP). The TP metric uses the followinginputs: (a) the time horizon over which the portfolio would be held (T);(b) threshold horizon (T′); (c) threshold level (β); (c) number ofsimulation runs (N) (d) number of paths/run of simulation (m=1000 bydefault).

The output is preferably (a) the percentage of times the value of theportfolio goes down (compared to the initial starting value) below thethreshold level (B) and stays for T′ days below this threshold level;and (b) the average drop in the value of the portfolio (compared to theinitial starting value) conditional on (a) happening. For example,β1=−5%, T′=2 days, T=10 days, m=10 and the starting value of theportfolio is $100. When the portfolio value is simulated, the followingpath is obtained: $102 (day 1), $98 (day 2), $94 (day 3), $90 (day 4),$94 (day 5), $96 (day 6), $98 (day 7), $90 (day 8), $95 (day 9) and $97(day 10).

The relevant sequence here for computing (a) and (b) are the portfoliovalues from Day 3 to Day 5 since the portfolio value is less than $95 oneach of these three days. The drop to $90 on day 8 does not count as arelevant event here since T′=2 and the portfolio value returned to thethreshold level on Day 9, which is before the threshold window of 2 daysexpired. Further, suppose that in none of the other nine paths (sincem=10) the event of crossing the threshold and staying below for thethreshold horizon is triggered. In this case, the output is 1/10 for thepercentage of paths for which the event is triggered. Further the drop,given the event occurring, is −10%. These is the output of onesimulation run. These numbers are preferably averaged over the number ofsimulations runs.

The following describes in a preferred embodiment, OrthogonalGeneralized Autoregressive Hetero Skedasticity (“garch”) is employed forthe methodology. Preferably, the steps that are performed are asfollows.

1. Principal Components Analysis: A principal components analysis isperformed on the returns of the securities comprising the portfolio.Those components which explain more than 80% (or 90%) of the variationare preferably retained. Choosing the principal components to retain ineach particular portfolio preferably calls for judgment and is notcurrently programmed in. Generally when the model runs for otherportfolios, judgment in retaining the principal components is preferablyincorporated on a case-by-case basis. The program for generating therisk metrics detailed above preferably takes the number of principalcomponents to be retained as an input. Preferably, a separate programoperates to generate the principal components for each portfolio ofsecurities and to show the cumulative percentage of variation that theprincipal components explain.

Continuing now with reference to the preferred methodology, 2. Garchfitting on each of the principal components, fitting of the conditionalmean and the conditional variance, three choices are preferably madehere.

Choice A. Auto Regressive Moving Average (“ARMA”) process for theconditional mean. For simplicity and consistency with known proceduresin the art, the order of the ARMA is restricted to be ARMA(1,1), as themost general. Thus, a choice between; i. the constant conditional meanwhich corresponds to ARMA(0,0); ii. an ARMA(1,0), which corresponds to aprocess with an AR component but no MA component; and iii. an ARMA(0,1),which corresponds to a process with no AR component but with an MAcomponent, and iv. ARMA(1,1) which has both AR and MA components.

Again, the order of the ARMA process to be used for each principalcomponent is preferably determined on a case-by-case basis based on anexamination of the autocorrelation function (ACF) and partialautocorrelation function (PACF) of each principal component. Preferably,a separate software program operates to take the number of principalcomponents retained as input, apart from the original time-series ofreturns on the securities in the portfolio and produce the ACF and PACFof these principal components.

The ACF and PACF are produced up to a maximum of 10 lags. The criteriafor choosing between ARMA(0,0), ARMA(1,0), ARMA(0,1) and ARMA(1,1) arepreferably as follows: i. if neither the ACF nor the PACF show anyspikes at any of the lags, then the time series process resembles whitenoise and hence the constant conditional mean, or ARMA(0,0), is asuitable approximation for the conditional mean process of thatprincipal component. ii. if the PACF declines exponentially then thereis an AR component to the process while if he ACF declines exponentiallywhen there is an MA component to the process. Thus, if the PACF declinesexponentially while the ACF shows spikes at certain lags but does notdecline exponentially, then that is indicative of an AR component to theprocess but no MA component, and ARMA(1,0) is chosen in this case. iii.If the ACF declines exponentially while the PACF shows spikes at certainlags but does not decline exponentially, then that is indicative of anMA component to the process but no AR component, and ARMA(0,1) is chosenin this case. iv. If the ACF and PACF both show persistent spikes at alarge number of lags, then there is both an AR and an MA component tothe time series, and ARMA(L, 1) is chosen in this case.

Choice B. Incorporating the leverage effect in the conditional varianceversus ignoring the leverage effect

Choice C. Using the students-t distribution versus using the standardnormal to take into account the fat tails

3. Monte Carlo simulation for the value of the portfolio based on theprocess fitted for the principal components. Here the loadings of eachindividual security on the principal components and the weights of eachindividual security in the portfolio is preferably used to simulate theportfolio values.

As will become evident to one skilled in the art and in accordance withthe teachings herein, the present invention provides an improved mappingbetween state-dependent probabilities, decision paths, and values acrosscounterparties. The systems and methods described herein addressshortcomings in the prior art by employing contractual bargaining withagent-based computational methods for the dynamic allocation,optimization, and pricing contingent obligations between multiplecounterparties. The processes preferably employ a hierarchy or tieringof binding incentive compatible contingent strategies which includeoptimal liquidation policy for matched assets and liabilities based uponstochastic volume/price schedule related to statistically non-stationarysupply/demand elasticities and order-flow.

Although the present invention is described and shown in relation toparticular embodiments thereof, many other variations and modificationsand other uses will become apparent to those skilled in the art. It ispreferred, therefore, that the present invention be limited not by thespecific disclosure herein.

1. A method for dynamically allocating control rights with regard to atleast one respective history and at least one possible future path inorder to offset risks and to optimize net gain or net loss associatedwith an inventory of at least one of assets and liabilities used tosecure an extension of credit, the method comprising: providing one ormore processor readable media; providing one or more processorsoperatively coupled to the one or more processor readable media; storingon the one or more processor readable media at least one database thatincludes: electronic counterparty information representing a pluralityof counterparties; electronic agreement information representingagreements related to the extension of credit associated with theplurality of counterparties; electronic control rights informationrepresenting respective rights to control inventory for at least one ofthe respective counterparties; providing, by the one or more processors,at least one respective agreement related to the extension of credit tobe executed by each of a plurality of counterparties; receiving by theone or more processors, from each of the counterparties an executedrespective agreement representing that the counterparties have becomecontractually bound; receiving, by the one or more processors, from atleast some of the counterparties respective commitments of at least onerespective control right to respective inventory for securing theextension of credit, the at least one respective control rightrepresenting one or more rights that each of the at least some of thecounterparties have to control the respective inventory; determining, bythe one or more processors, an expected present value of at least one ofthe at least one respective control right associated with the respectiveinventory at the time of the respective commitment, based on at leastthe respective inventory's at least one history and at least onepossible future path; aggregating, by the one or more processors, thevalue of the respective control rights to the respective inventory intoan inventory pool; charging calculating, by the one or more processors,a respective margin amount to for each of the at least some of thecounterparties, wherein the respective margin amount is proportional tothe respective value of each of the at least some counterparties' prorata inventory control rights contribution and a function derived fromone or more of state-dependent and path-dependent dynamics governing thevalue of that contribution over time, and further wherein the respectivemargin amount is subject to change over time; receiving, from each ofthe at least some of the counterparties, the respective margin amount;securing, by the one or more processors, the extension of credit withthe inventory pool; receiving, by the one or more processors, anotification that at least two of the plurality of counterpartiesexchange respective paths representing that one of the at least two ofthe counterparties assumes another counterparty's at least one of: atleast one state; and at least one path, wherein the at least one stateand the at least one path are associated with at least one of therespective control rights; simulating, by the one or more processors,states and paths for the at least two parties; accounting, by the one ormore processors, for evolving contractual rights and duties among eachof the at least some of the counterparties based on at least thesimulated states and paths; and allocating, by the one or moreprocessors, the control rights to at least some of the inventory in theinventory pool after at least one respective agreement term is not metby at least one of the counterparties.
 2. The method of claim 1, whereinthe respective agreement sets forth at least one of respectiveintermediation requirements and incentives associated with respectiveexpectations of the counterparties.
 3. The method of claim 2, whereinthe expectations are defined as a function of state-dependent,path-dependent, or state-dependent and path-dependent simulations. 4.The method of claim 2, further comprising implementing at least one ofthe respective intermediation requirements to minimize costs andmaximize benefits associated with each counterparties' performance. 5.The method of claim 1, wherein the governing includes at least one ofvalue, volatility, value at risk, asset liquidity, and interest.
 6. Themethod of claim 1, further comprising securing the contractual rightsand duties.
 7. The method of claim 6, wherein the securing includesoffsetting payments associated with the contractual rights and dutiesrelative to each of the respective simulated states and paths.
 8. Themethod of claim 1, further comprising accounting for probable outcomesas a function of activities of each of the plurality of parties.
 9. Themethod of claim 8, wherein the accounting comprises an orthogonal garchmethodology.
 10. A system for dynamically allocating control rights withregard to at least one respective history and at least one possiblefuture path in order to offset risks and to optimize a net gain or netloss associated with an inventory of at least one of assets andliabilities used to secure an extension of credit, the systemcomprising: one or more processor readable media; one or more processorsoperatively coupled to the one or more processor readable media; atleast one database stored on the one or more processor readable media,the at least one database including: electronic counterparty informationrepresenting a plurality of counterparties; electronic agreementinformation representing agreements related to the extension of creditassociated with the plurality of counterparties; the one or more mediahaving instructions for causing the following steps to be performed bythe one or more processors: providing at least one respective agreementrelated to the extension of credit to be executed by each of a pluralityof counterparties; receiving from each of the counterparties an executedrespective agreement received from each of the counterpartiesrepresenting that the counterparties have become contractually bound;receiving from at least some of the counterparties respectivecommitments of at least one respective control right to respectiveinventory received for securing the extension of credit, the at leastone respective control right representing one or more rights that eachof the at least some of the counterparties have to control therespective inventory; determining an expected present value of at leastone of the at least one respective control right associated with therespective inventory at the time of the respective commitment, based onat least the respective inventory's at least one history and at leastone possible future path; aggregating the value of the respectivecontrol rights to the respective inventory into an inventory pool;calculating a respective margin amount for each of the at least some ofthe counterparties, wherein the respective margin amount is proportionalto the respective value of each of the at least some counterparties' prorata inventory control rights contribution and a function derived fromone or more of state-dependent and path-dependent dynamics governing thevalue of that contribution over time, and further wherein the respectivemargin amount is subject to change over time; receiving, from each ofthe at least some of the counterparties, the respective margin amount;securing the extension of credit with the inventory pool; receiving anotification that at least two of the plurality of parties exchangerespective paths representing that one of the at least two of thecounterparties assumes another counterparty's at least one of: at leastone state; and at least one path, wherein the at least one state and theat least one path are associated with at least one of the respectivecontrol rights; simulating states and paths for the at least twoparties; accounting for evolving contractual rights and duties amongeach of the at least some of the counterparties based on at least thesimulated states and paths; and allocating the control rights to atleast some of the inventory in the inventory pool after at least onerespective agreement term is not met by at least one of thecounterparties.
 11. The system of claim 10, further comprising: a funderaccount for the extension of credit; and a collateral buffer accountthat represents at least some of the inventory that is available fortransfer, wherein at least some of the agents operate to map thecounterparties' objective states to conditional probabilities.
 12. Thesystem of claim 11, wherein the conditional probabilities are mapped asconditional expectations onto conditional utilities, and the conditionalutilities are mapped onto conditional payoffs resulting in a contingentpayoff function of the at least some agents.
 13. The system of claim 10,wherein the agents employ a library of dynamic and endogenous hierarchyof rules corresponding to a future or history of states and paths of theagents.
 14. The system of claim 13, wherein the rules encompass thecontinuum of contingencies materially relevant to transactions among thecounterparties.
 15. The system of claim 13, wherein the rules are usedto formulate contracts to be entered into between the funders, thecounterparties.
 16. The system of claim 10, wherein at least one of theagents transacts on behalf of one of the respective counterparties. 17.The system of claim 16, wherein the at least agent transacts based upona state-dependent utility function, a path of realized states andsimulated paths of future states.
 18. The system of claim 17, whereinthe at least one agent may choose to: pay a termination penalty to exitthe system, wherein termination penalty is based upon an opt-outfunction; or pay a substitution/replacement option premium in order toexchange a path history with another agent, wherein the premium is basedupon a path-switching function.
 19. The system of claim 18, wherein thepayments are deducted from at least one account accessible by therespective agent engaged in opting out or switching paths.
 20. Thesystem of claim 10, wherein the system is a dynamic open system fordistributed stochastic control of strategic interactions among dynamicoptimizing agents across random states, and further wherein the actionsof any one affects the joint costs and benefits for all the agents.